Rising European Nationalism Is Destroying The Euro

The European crisis and the recent round of elections in Europe
have shown an undercurrent of political nationalism, writes
UBS economist Paul Donovan.

In Greece, Golden Dawn got nearly 7 percent of the vote in June
17 elections, and Syriza also campaigned on a nationalism
platform. In France, the Front Nationale secured 14 percent of
the vote in the first round and managed national assembly
representation for the first time in decades.

Meanwhile, The True Finns are the third party of Finland, while
Sinn Fein is in the second spot in Ireland if recent opinion
polls are to be believed.

And this nationalism is making it harder to resolve the European
crisis.

What's causing the wave of nationalism?

Donovan believes nationalist parties are gaining political
support because of two common characteristics among their
supporters.

First, they tend to come from the economically insecure strata of
society though not the lowest income groups. "It is more likely
to be those in society who feel themselves as being most at risk
in economic terms," writes Donovan. "That implies that they have
something to lose (thus are not the lowest income groups) and
that they feel threatened." This also explains why nationalism is
as prevalent in non-periphery, as it is in peripheral Europe.

They are also hostile to immigration and perceive outsiders to
pose an economic and a cultural risk.

Nationalism can only hurt the euro

The major consequence of this nationalism according to Donovan,
is that it will make the European crisis harder to resolve.

Weaker countries are resentful of conditions imposed on them by
outsiders. At the same time, the stronger economies are resentful
that their relative wealth is being channeled away from national
uses.

"The challenge is that if the Euro is to hold together (and we
believe it will) these nationalist sentiments must be subsumed
into a regional sentiment. Fiscal confederation should not be
about “German money” going to “Greece”, or whatever
combination.

Instead fiscal confederation should be about wealthier Euro
citizens funding assistance to less wealthy Euro citizens. To get
beyond the national boundaries implicit in the current national
sentiment is essential to the eventual and necessary integration
of the Euro area."

Just as importantly, such nationalism will make the economies
less competitive:

"There is a real risk that by fostering an environment where
political nationalism develops, the ensuing prejudice will
undermine competitiveness and productivity in the Euro economy.
...Festering resentment and nationalism is unlikely to produce
that sort of a climate. Given how important it is to restore
competitiveness to the Euro area economy, this is not a
negligible economic cost."